1. The Definition: What is an NDA?
A Non-Disclosure Agreement is a written contract that officially recognizes a legally binding relationship between two parties — a Disclosing Party and a Receiving Party.
Both the Disclosing Party and Receiving Party mutually understand that certain information is sensitive, technical, or nonpublic and is valuable for commercial or other purposes.
Further, the two parties promise that they will not use or disclose the protected information with anyone else as they discuss and explore the possibility of entering into a business relationship with each other.
A simple NDA Form will identify the following basic elements:
- The “Effective Date”: when the promise of privacy starts
- The “Transaction”: the potential business relationship being explored
- The “Confidential Information”: private, secret, sensitive, or valuable data
- The “Disclosing Party”: the individual or entity sharing information
- The “Receiving Party”: the individual or entity receiving information
- The “Representatives”: other people (i.e., directors, officers, employees, agents or advisors) who may share, receive, or protect information
For a full briefing, please view our complete list of items and NDA clauses that could be included.
2. The 2 Types of NDAs: Mutual and Unilateral
Non-disclosure agreements are commonly used when one or both parties have valuable, confidential, or sensitive information like trade secrets, customer lists, or proprietary know-how. In order to turn a great idea into cash flow, both parties consciously choose to share confidential information to explore a possible collaboration or business relationship.
Two major types are used to protect confidential information:
|Unilateral or One-Way NDA||Bilateral or Mutual NDA|
|Only one party is disclosing valuable information||Both parties are disclosing valuable information|
|Only one party promises to protect the information||Both parties promise to protect the information|
|Used by an inventor and potential investor||Used in a joint venture or merger|
Non-disclosure agreements can also be tailored for specific scenarios, including:
- Employee – The employee version of this agreement is used to notify a company’s employees that they are not to discuss certain business information outside of work. In order for businesses to protect their valuable information, this document helps employees acknowledge that discussing any sensitive information is a breach of their contract.
- Interview – It’s possible that in some interviews, it is necessary to reveal sensitive information. In these cases, companies should consider having their interviewees sign an agreement before the job interview.
- Inventor – This type of agreement can be used by inventors to protect their unpatented inventions. Inventors may find themselves in situations where they need to discuss their project with an interested party. In this case, it’s important that the inventor can ensure that this third party will not relay any information elsewhere after the meeting.
- Real Estate – In the real estate community, this agreement is used to protect the buyer, seller, broker, and anyone else involved in a property transaction. As real estate sales involve the disclosure of significant personal and financial information, having an NDA ensures privacy and also prevents the involved parties from brokering secret deals.
- Trade Secret – With this type of NDA, companies can confidentially disclose their trade secrets to third parties without fear of theft. This is useful for protecting information such as special formulas, practices, instruments, software, technical designs and blueprints, and customer lists.
Be sure to choose the most appropriate type of NDA for your situation.
3. When Do You Need an NDA Form?
If you are unsure about what to do if you are asked to sign an NDA, consider these 5 things:
- The document’s scope: Understand the main questions the NDA is asking you to do. What type of information are you required to keep confidential? What steps must you take to keep it confidential? How long will the NDA last?
- Look for broad language: Be wary of broad language that doesn’t relate to the information you already have personal or public knowledge of. Otherwise, you are handcuffing yourself and opening yourself up for greater liability.
- Liquidated damages: If you see a liquidated damages provision, run. A liquidated damages provision ensures that if you breach the NDA, the company or employer will be entitled to a specific amount of damages without ever having to prove you caused actual damage to them.
- The consequences of breaching it: Look to see if there are any unusually harsh or unfair punishments should you breach the NDA. If the punishment is disproportionate to the breach, hold off on signing.
- You can negotiate: You can always ask to modify the document if you find something you think is unjust or out of place. It can’t hurt to ask, and companies are more likely to allow changes when the NDA is last-minute.
4. The Consequences of Not Using One
Without a valid NDA, someone else may make money off of your once-in-a-lifetime idea or confidential information.
Problems Caused by Not Using a Confidentiality Agreement
|Disclosing Party||Receiving Party|
|Lost opportunity cost for:|
2. Fame or name recognition
3. Future viable business
|Penalties for unpermitted uses:
2. Loss of reputation
3. Court order to stop business
|Expensive lawyer fees to:|
1. Engage in a legal battle
2. Seek remedies for unlawful use or disclosure of protected information
3. Sue for trade secret misappropriation
|Expensive lawyer fees to:
1. Engage in legal battle
2. Respond to a lawsuit for unlawful disclosure of protected information
3. Respond to alleged trade secret misappropriation
|Mental anguish due to:|
1. Having your idea stolen and monetized by another
|Mental anguish due to:
1. Being embroiled in a drawn out lawsuit
As a legally enforceable agreement, this document can help alleviate genuine concerns that someone may leak your confidential information or use that valuable information for their own economic advantage.
5. What Should be Included in the Scope of the NDA
A simple confidentiality agreement should generally have at least the following:
1. Who is on the hook? (the “Parties”)
The Disclosing Party, either a person or a company, usually has valuable information that they want to share with the Receiving Party in order to explore a potentially fruitful business relationship (i.e., the “Transaction”).
Both parties should sign and date the document for it becomes a legally binding document.
If you are hiring employees, you may want to consider adding a confidentiality clause in their employment contract.
2. What is protected? (the “Confidential Information”)
Any data or information that is private, secret, sensitive, or valuable will be protected.
Confidential information can include:
Exclusions define what kind of information is NOT protected by the agreement and include:
- publicly known or available information (i.e., Google or USPTO website)
- non-confidential information shared by someone else besides the Disclosing Party (i.e., a third party) to the Receiving Party
- information that can be shared with permission from the Disclosing Party
- information independently developed by the Receiving Party
- information the Receiving Party must share because of a lawsuit
3. What is the duration? (the “Effective Date” and “Disclosure Period”)
The agreement should also spell out when the promises to protect information begins (the “Effective Date”) and the duration the protected information must not be shared with others (the “Disclosure Period”).
Usually, the parties agree to when the term of the agreement will end (the “Termination” provision). For example, the Agreement could terminate whenever:
- the Agreement expires
- the Transaction is completed; or
- a specific amount of time has passed.
4. Where does the agreement apply? (the “Jurisdiction”)
If confidential information is leaked or inappropriately used by one party and a disagreement grows into a lawsuit, the parties should agree that the laws of one state will apply. In other words, both parties consent to appear in a specific state.
It is important to know that some states like California encourage employees to be entrepreneurial, so the laws there disfavor non-compete clauses (also known as a “covenant not to compete” or CNC) and employment agreements that restrict an employee’s mobility after leaving one company.
5. What other details should be included in a confidentiality agreement?
- Disclaimer: the protected information is provided “as is” and is not necessarily accurate or complete
- No License: the Agreement does not give either party any patent, copyright, or other rights to the information provided
Non-Disclosure: the Receiving Party promises to not let others know that
- the Disclosing Party has shared or used Confidential Information
- a Transaction is being discussed or negotiated
- a Transaction has taken place, including the details of the relationship
Obligations: the Receiving Party and its Representatives promise to
- not share or use the protected information with others
- protect the security and confidentiality of the protected information
- prevent any unauthorized access, use, or disclosure of information
- reasonably safeguard the information’s confidentiality (“need to know”)
- return or destroy any documents after the Agreement ends
- tell the Disclosing Party asap if the protected info is disclosed or lost
No Obligation: either party may:
- reject any proposals related to the business relationship
- walk away from negotiations at any time and for any or no reason
Remedies: if either party breaks their promise to one another
- no amount of money may be enough to make it ever “right” again
- injured party may ask the court to order the other party to (not) do something (i.e., specific performance, injunction, or equitable relief)
- the injured party will go after both money and non-money damages
- whoever is in the wrong will need to pay for attorney fees
- Non-Solicitation: either party may prevent the other from soliciting or offering employment to the other party’s employees or from diverting business away from the other party
- Notice: if at any time one party needs to tell the other something important (i.e., their computers were hacked and the Confidential Information was stolen or someone has sued them in court), then such notices should be sent to a certain person, email address, or mailing address
You may also require that such notices be delivered by a certain method:
- Delivery in person
- Overnight courier service
- Certified or registered mail
- Postage prepaid
- Return receipt requested
6. Free Non-Disclosure Agreement Sample